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February 7, 2013

Schwab Rolls Out ‘Game-Changer’: A Commission-Free ETF Platform

OneSource platform sets no limit on how many trades advisors can make with 105 ETFs on offer

(Photo: AP)

Charles Schwab announced Thursday the launch of an exchange-traded fund platform, Schwab ETF OneSource, that offers advisors and retail investors commission-free access to 105 ETFs from six big ETF providers.

The new platform spans all 14 Morningstar asset-class categories, with funds from State Street SPDR ETFs, Guggenheim Investments, PowerShares, ETF Securities, United States Commodity Funds and Charles Schwab Investment Management.

“It’s an industry game-changer,” said Jim Ross, global head of ETFs for State Street SPDR, at the press conference in New York announcing the OneSource launch. Ross added that State Street—whose SPY fund is the biggest ETF in the world—never expected advisors and retail investors to adopt ETFs to the degree they have when SPY launched 20 years ago.

(SPY is not one of the ETFs available commission-free on Schwab ETF OneSource. To learn which 105 funds are available on the platform, visit schwab.com/ETFOneSource.)

As of Thursday, all Schwab clients who buy ETFs online through Schwab ETF OneSource will pay the same operating expense ratios that they would pay elsewhere, but without paying a commission.

“No paperwork is needed,” said Jim McCool (left), Schwab’s Client Solutions executive vice president, at the press conference. “It’s automatic and simple. We already have clients today making trades without a commission.”

Tom Lydon, president of Global Trends Investments and editor and owner of ETFtrends.com, also called the Schwab launch a game-changer. Lydon predicted in a comment that the move “will transform the dynamics of the $1.4 trillion U.S. ETF business” to the same degree that Schwab’s no-transaction-fee mutual fund platform, OneSource, changed that market 20 years ago.

“The commission-free service will dramatically lower the cost of using ETFs for [retail] investors,” Lydon wrote. “The platform will also make ETFs more attractive to financial advisors who are increasingly using the low-cost investment products in place of mutual funds and individual stocks.”

Forcing a Commission-Free Move by Other ETF Providers?

Ron DeLegge, editor of ETFguide.com and an AdvisorOne contributor, predicted that Schwab’s inclusion of outside ETF providers on its commission-free platform would force competing brokers to do the same.

“From another angle, this will force ETF providers who are not on commission-free platforms to either jump on or risk losing potential assets,” DeLegge said in an email. He added that the Schwab move sets the stage for ETFs to completely up-end the 401(k) business. “The obstacles of high trading costs have been removed.”

This is not the first time that a financial services firm has offered commission-free ETF trading to its investors, but the new platform offers the most commission-free ETFs available, spanning major asset categories from leading providers.

Schwab itself already offers its own ETFs on a commission-free basis. And TD Ameritrade in 2010 launched its ETF Market Center for long-term investors and affiliated RIAs that included 101 commission-free ETFs picked by Morningstar. However, TD Ameritrade requires participating advisors to hold the ETFs in an account for a minimum of 30 days, and advisors who trade the ETFs before the 30-day period incur a $19.95 charge.

A leader in the retail ETF market, Charles Schwab had $152 billion custodied on its platform as of Dec. 31, and the commission-free Schwab ETFs had $8.6 billion in assets as of that date. In September, Schwab announced dramatic cuts of up to 59% for the expense ratios of all 15 Schwab ETFs, reflecting a trend last fall toward lowering such fees that also included such firms as Vanguard and BlackRock.

One Schwab advisor client, Lawrence E. May, a registered investment advisor with Strategic Wealth Management Group of New York, said he was thrilled with the no-commission offering. Previously, May has offered clients all-Schwab, zero-commission ETF portfolios, but now he has 105 ETFs to choose from, he said.

“Our advisor clients are helpless when it comes to pulling the trigger. They don’t have time to manage all these ETFs,” May said, noting that his actively managed ETF portfolios offer no transaction fees and low expense ratios.

Previously, May would pay an $8.95 commission on every non-Schwab ETF he traded through Schwab.

‘Investors Can Trade In and Out 100 Times a Day’

“Investors can trade in and out of these ETFs 100 times a day, and they won’t pay a commission,” said Peter Crawford, head of Schwab’s Client Solutions group, in introducing the new platform. “This isn’t a gimmick. There are no gotchas here. This is sustainable.”

Representatives for all six of the ETF providers now available on OneSource were on hand at the press conference, and all six expressed enthusiasm for the market reach that their partnership with Schwab offers.

Citing the statistic that only 17% of retail investors at Schwab are currently invested in ETFs, Will Rhind, managing director of precious metals provider ETF Securities, spoke of “the huge growth potential” that the new platform delivers to his firm.

Similarly, U.S. Commodity Funds Chief Investment Officer John Hyland said the ETF industry is maturing, so while a number of firms and funds are likely to consolidate or shut down this year and next, more investors will get into ETF investing as education improves and people learn more about the product.

“People may underestimate the significance of today’s news,” Hyland said at the Schwab press conference. “It’s all about distribution to the end user, and this is a very efficient way to do it.”

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